2020 (12) TMI 384 - AT - Income Tax

Addition u/s 40A(3) - case of the assessee is that there are no purchases from the sister concerns therefore section 40A(3) has no application - case of the Assessing Officer is that the payments made by the assessee to the above two sister concerns are relate to purchases therefore section 40A(3) applies - CIT-A gave a finding that it is not correct to say that the payments represent purchases without any adverse material - HELD THAT - Even before us no material is placed with regard to payments made by the assessee relates to purchases. In view of the above specific finding given by the ld. CIT(A) we find no reason to interfere with the order passed by the ld. CIT(A). Thus this appeal filed by the department is dismissed.

Summary

Issues involved:
Appeal by Revenue and cross objection by assessee against CIT(A)'s order for Assessment Year 2009-10, involving disallowance under section 40A(3) of the Income Tax Act.

Analysis:
1. Revenue's Grounds of Appeal:
- Revenue challenged CIT(A)'s order as erroneous, specifically disputing disallowance under sec. 40A(3) due to lack of expenditure proof and invoking RAP audit objection.

2. Disallowance under Section 40A(3):
- Assessee, a small trader, faced disallowance of ?27,90,841 under sec. 40A(3) for cash payments. Assessee contended that payments to sister concerns were not purchases, hence sec. 40A(3) didn't apply.
- Assessing Officer disallowed the amount, citing cash payments contravening sec. 40A(3) provisions, leading to addition in income.

3. CIT(A) Decision:
- Assessee produced ledger accounts of sister concerns showing cash payments without corresponding sales, arguing against purchase representation. CIT(A) found no adverse material to support purchases claim.
- CIT(A) concluded that sec. 40A(3) couldn't be invoked due to lack of expenditure, directing deletion of addition made by AO.

4. ITAT Decision:
- ITAT upheld CIT(A)'s decision, emphasizing lack of evidence supporting purchases and agreeing with the finding that sec. 40A(3) was inapplicable.
- ITAT dismissed Revenue's appeal, stating no interference was needed based on CIT(A)'s specific findings.

5. Cross Objection:
- Assessee's cross objection supporting CIT(A)'s order was dismissed as no grievances were raised against it.

In conclusion, the ITAT upheld the CIT(A)'s decision to delete the disallowance under sec. 40A(3), ruling in favor of the assessee and dismissing both the Revenue's appeal and the assessee's cross objection.